Market Perspective

Insights On Today’s Home Pricing Challenges

IMPACTS – The New Tax Bill

Posted: January, 2, 2018

There’s a lot to sort through on the new tax bill just signed into law. Not everyone seems sure of the full impact, but there are a couple of key provisions related to real estate that we’ve taken a closer look at. The combination of changes to the mortgage interest deduction, the property tax deduction, and the increase in the standard deduction together will have an impact on real estate.

Here is the summary of these key provisions: A) a lowering of the cap on deductible mortgage debt from $1 million to $750,000; B) a limit on combined property tax and sales tax deductions to $10,000; and C) an increase in the standard deduction to $12,000 for a single filer and $24,000 for joint filers.

According to a recently published article from Zillow, “roughly 44 percent of U.S. homes are worth enough for it to make sense for a homeowner to itemize their deductions and take advantage of the mortgage interest deduction. Under a reconciled House and Senate tax reform plan that proportion of homes drops to 14.4 percent.” Looking more closely at the local markets we operate in, on average across all counties in California that number drops from 63% down to 30%. In Colorado the drop is even more dramatic falling from 72% down to 17% under the new law.

According to Mark Zandi, Chief Economist at Moody’s, the national impact on housing prices could reach minus 4 percent by mid-2019, meaning home prices are likely to be 4 percent lower than if there had been no new tax bill. While this might produce a desirable hedge to the soaring prices in our markets, it appears it may do nothing to improve the housing shortage itself. Moody’s states “The SALT change plus the higher standard deduction and tighter limit on the mortgage interest deduction also reduce the tax incentive for home ownership, which is likely to slow home construction and sales, and moderately suppress home values and property tax growth in higher-price markets."

Most importantly, according to Zandi, “the mortgage-deduction limits may also worsen one of the housing market’s most vexing issues right now: a severe shortage of inventory in many areas. Homeowners with high-balance mortgages will be reluctant to sell and lose the deduction that would be grandfathered in for current owners.”

The long and the short of it is, that we don’t see a real shift to improving inventory in the housing market any time soon. We continue to focus our central effort on helping to address the need in core infill markets of metro areas where job growth and population growth are pressing demand.